Surprising Reasons Why Our Bad Economy is a Great Time to Start a Business

RISMEDIA, Dec. 20, 2008-No one has to be told how grim the employment scene is these days. The ever-higher prices consumers are paying for everything from food to health insurance makes it pretty clear that we’re not in an economic boom.

Factor in company closings, downsizings and the financial uncertainty so many organizations are struggling with, and it’s not hard to see why many job-seekers-not to mention the unhappily employed-are discouraged about the future. But don’t despair. If you find yourself out of a job, wishing you could change jobs, or simply needing a second source of income, Ed Hess and Charles Goetz have a suggestion for you: Start a small business.

“Entrepreneurship can be a great way to make a living, even in a sluggish economy,” says Hess, professor of business administration and Batten Executive-in-Residence at the Darden School of Business at the University of Virginia and coauthor along with Goetz of the upcoming book “So, You Want to Start a Business? 8 Steps to Take Before Making the Leap” (FT Press, September 2008, ISBN: 978-0-13-712667-5, $18.99). “People need certain products and services regardless of what the economy looks like. If your small business fulfills one of those needs, and does it well, it will succeed in good times and in bad.”

But, what about all the scary statistics out there? You may be wondering. Numbers that say less than 50% of start-ups survive four years and that only 35% of start-ups survive for seven years. Hess and Goetz assert that these start-up failures are more a reflection of the owners’ inability to properly run a business than of the market for small businesses itself.

“If you’ve done your homework and you’re truly committed, don’t let either the statistics or the bad economy stop you,” advises Goetz, who is a distinguished lecturer in entrepreneurship at Goizueta Business School, Emory University. “If a business owner doesn’t make the right decisions, he or she can fail under the best of circumstances. But do all of the necessary planning on the front end and avoid preventable mistakes as things get going, and chances are good that your enterprise will be successful-in any market!”

So if you have a business idea that you think could work, Hess and Goetz provide the following insights:

- It’s the perfect time to be in charge of your own destiny. The idea of going it alone can be a scary proposition regardless of how well the economy is doing. Maybe you’re worried that you can’t find enough customers, for example. But the same things that can happen to you can just as easily happen to some big, established company. The harsh truth is that these days your work life expectancy in Corporate America can be pretty uncertain. At the beginning of 2008, Career Protection’s Annual Layoffs Forecast predicted a 37% increase in layoffs and reductions for the year. And it seems as though companies are living up to those numbers. Wall Street companies had already laid off about 50,000 employees by May, and major companies like Starbucks have announced job cuts and store closings in recent months.

“The benefit of being a small business owner is that in times like these you control your fate,” says Hess. “You don’t have to worry that you’ll come in to work one day and get the ax. You don’t have to live with someone else-perhaps someone less competent or hardworking than you-in charge of your future. You can make changes in your business as you see fit. There is a definite sense of comfort in knowing that you are the one making the decisions that will affect your life.”

- Quickly learning the ropes will make a better business owner out of you. Getting started during a bleak economic situation means you’ll immediately have to fine tune your business skills. You’ll have no choice but to be as frugal as possible. And you will quickly learn the importance of pleasing every customer, every time. These lessons will serve you well down the road.

“Starting a small business during an economic slowdown can prove more of a challenge at first,” admits Goetz. “You may have to be a one-man show for a while, or get things started from your basement rather than a fancy store or office space. But just imagine how successful you can be when the economy picks back up if you are already used to making things work when customers are watching their spending.”

- You can start small and keep your job as a safety net. This is good advice for any worried entrepreneur, but it makes even more sense in a sluggish economy. Starting small gives you the ability to keep your day job while you try to get your business off the ground, and it lets you “test drive” your business idea without making a full financial commitment. If your business starts to pick up, you can make the decision to transition into a full-scale business or keep things small and use your new enterprise as a way to make some extra money on the side.

“A small business doesn’t have to be an entity with store or office space,” says Hess. “You can do freelance website design from your home office at night, for instance, or run a landscaping business on the weekends. And if you are able to pick up a few regular customers while the economy is slow, you’ll be able to quit your day job and really hit the ground running when the time is right.”

Yes, credit is tight, but there are other ways to finance your operation. It’s true. Lenders are no longer handing out small-business loans like candy. But if the inability to get a small-business loan is keeping you from going out on your own, know that there are ways to be creative with your financing.

“First, figure out how much of your savings you can put toward the business without incurring too much financial risk-typically, around 20 percent of your net worth,” says Goetz. “Then, consider asking your friends and family if they would be willing to contribute. Explain why you think your business will work and let them know how and when you will pay them back. You might also consider putting some of your expenses on a credit card. I stress the word ‘some.’ If possible, use plastic for small expenses only as you don’t want to acquire too much credit card debt when you are starting out.”

Small businesses can adjust more easily to tough times than corporations. Big, bureaucratic corporations and even mid-size companies cannot weather economic lags as easily as small businesses. You might think that large companies can just throw money at the problems they encounter during a slow down. But the avalanche of layoffs that have occurred this year prove this notion wrong. Even large, well-capitalized companies can run out of money shockingly fast, and what’s more, they aren’t nimble enough to change courses when they need to do. That gives small companies a distinct advantage.

“Because small businesses don’t have tons of employees to train on new procedures or a lot of red tape to go through to try a different way of marketing a product, they can be more flexible,” explains Hess. “They can more easily try a different business model and then switch things up if it isn’t working. The ability to be flexible can mean the difference between survival and death in a tough economy.”

- You can get better things cheaper. If you are a small-business owner looking for employees, you’ll likely be able to hire more skilled workers for less money than they might normally accept. Maybe they desperately need the work, or maybe they just understand that slow economic times mean lower salaries (and they trust you’ll make it up to them when the recession is over). You may also be able to get a good deal on an office lease or storage space. The real estate market is suffering right now so more and more property owners are looking to make money on their properties any way they can.

“You may also be able to lure good people and vendors in at lower prices with the promise that you’ll grow together,” says Goetz. “In other words, you can form sort of an unofficial partnership with these people-they’ll work hard for you now without expecting a lot of money right away, and in return they’ll get a cut of the profits they helped create in the future. This is a great way to build relationships with the people you work with both inside and outside your business. Just make sure these relationships are mutually beneficial. You don’t want to create a situation in which your employees or your vendors feel like they are being taken advantage of.”

- Outstanding service can be the “secret weapon” that helps you beat the competition. One area in which a small business should always excel is customer service-good economy or bad. But when things are down and customers have less money to spend, they really care that they’re getting a lot of bang for their buck. They’ll also be looking to cut out those businesses that aren’t meeting their needs. As a smaller company, you’ll have an advantage over larger competitors because you are better positioned to provide consistent, outstanding service. Small businesses just tend to be more flexible and can “turn on a dime” to meet client needs as they arise.

For example, let’s say you own a small hardware store and a customer is having trouble finding the right tool for a home project, and, as sometimes happens, they’re having trouble explaining to you exactly what they think they need. As a small business owner, you might offer to go to the customer’s house and check out the project to ensure they get the right tool. It’s unlikely that an employee or manager at a big box hardware store would be able or even willing to drop everything for a house call.

“Essentially, it’s easier for small businesses to go that extra mile,” says Hess. “When you’re a one-person or even a two- or three-person business, you expect to work hard and be on call at odd hours of the day as opposed to employees at larger, more rigid companies who tend to follow set procedures-procedures that don’t always fit with the customer’s agenda.”

“The economy is getting a lot of blame these days for sinking businesses,” says Hess. “I’m not saying it’s not making things harder for some companies-it certainly is-but it isn’t a deal-breaker by any means. Sometimes it’s just a convenient scapegoat. When it’s based on a good business opportunity and backed by commitment and plenty of old-fashioned hard work, a small business can do quite well during tough times.

“In fact, people who launch start-ups tend to be more passionate about their work than those who just go in for a paycheck,” he adds. “And passion goes a long, long way toward success. So, if you want to start a business-even in today’s bad economy-take the necessary steps to ensure it’s a viable opportunity, and get to work.”

Ed Hess lives in Charlottesville, Virginia, and spent most of his business life advising entrepreneurs and financing their business ventures. He went to college at the University of Florida and to law school at the University of Virginia and graduate law school at New York University. Hess’ professional career was spent with firms like Atlantic Richfield Company, Warburg Paribus Becker, Boettcher and Company, The Robert M. Bass Group, and Andersen Corporate Finance, and he has built three service businesses.

Charlie Goetz earned his college degree at Emory University and holds an MBA from the University of Texas. Goetz is a successful serial entrepreneur. He built several successful businesses, which in total employed over 1,500 people. Today, Goetz lives in Atlanta, Georgia, and is an investor in several new businesses and consults with people starting businesses. His specialties are marketing, customer acquisition, and product development.

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